Who Will Benefit From Health Insurance Mergers? Not You, The Consumer

In the wildly blunt back-and-forth between Cigna and Anthem over their would-be $47 billion merger, the clash of CEOs drew headlines, but the heart of the issue is efficiency in the health system — as it is with the reportedly imminent deal between Aetna and Humana.

It's an old story with a new Obamacare twist. But the key question remains the same. Who will benefit from all this supposed exorcism of waste? Spoiler alert: It isn't you and me, at least not as health care consumers.

The logic works like this: Obamacare is prodding the nation's five already giant health insurers into megamergers by promising to reward patient management of large populations as we move away from the old fee-for-service model that rewards more medical care rather than preventive health.

It might seem as though 14 million customers, representing more than 20 million covered people, makes Cigna, for example, plenty big to take advantage of this new way of thinking. But, the argument goes, with 360 metro markets in the United States, and several types of public and private medical coverage in play, a company must now be bigger than big.

Federal regulators, seeing this, will summarily approve the megamergers in the latest round, or so the logic goes. After all, it's federal action — punctuated by Thursday's Supreme Court decision upholding Obamacare subsidies in every state — that is creating the merger pressure to begin with.

There might be some logic to all that. Big companies have always said they need to scale up in order to deliver benefits of efficiency.

But even if this wave of mergers is good for the companies involved — a hotly debated question — the main winners are likely to be shareholders, top managers and Wall Street advisers in the health management cartel, not health care consumers.

So, will merging the largest health insurers — or management companies, as they now call themselves — from five down to three, or even two, succeed in removing cost and waste in the system?

That's hard to know, because big bureaucracies always have their own weight to carry. Anthem is promising an additional $900 million or more in annual profits, which implies a huge expense haircut.

But let's say the claims are on target and the mergers make the combined companies more efficient. Will prices for consumers fall, and will health outcomes improve as a result?

History has a clear answer to that question.

"Research has not been too friendly to these mergers," said Leemore Dafny, a professor at the Kellogg School of Management at Northwestern University, who has studied the effects of mergers in the health sector. "If past is prologue and if you look at the averages, premiums go up."

The problem is that the merger talks pit insurer against insurer dividing up the benefits, with hospitals, medical professionals and customers not represented. The only hope for consumers is that the Department of Justice and other regulators will do the right thing, just as the Federal Communications Commission did the right thing in showing Comcast and Time Warner Cable the door earlier this year when they sang the same song about efficiency and scale.

Doing the right thing does not necessarily mean regulators must reject these mergers outright. And it doesn't only mean they must order divestitures of a few business units that would make the combined companies anti-competitive.

Dafny and others have a better way to approach mergers. Simply put, the combining companies should be required to show in advance how the mergers would create broad social benefits, and how those benefits would be measured.

Why not impose this added burden? For all you libertarians out there who believe this would mark a dangerous incursion by government, remember: More than half of health care is paid by taxpayers. If a couple of insurers want to marry up with less oversight, fine. They just wouldn't get any Medicare, Tricare or Medicaid work.

In a May 28 article in the New England Journal of Medicine, Dafny and co-author Thomas Lee, a physician and health care executive, acknowledge that there's no easy way to calculate these broader benefits, known in the antitrust world as cognizable efficiencies, in advance.

"However, the absence of detail on these items should arouse concern about whether the goal of a given merger is truly to better serve the community," they wrote.

The companies certainly go into detail about measurable benefits for shareholders, and buried in their bylaws are the tens of millions that their CEOs would gain in a "change in control."

The article by Dafny and Lee was about mergers among hospitals and other health care providers, but Dafny said the same principles can apply to mergers of insurers. In a way, more is at stake because there are far fewer insurers left.

The beauty of imposing higher regulatory barriers on health insurance mergers is that these companies don't need any immediate help from each other. They're doing fine, thank you, as a result of Obamacare's universal health insurance mandate, internal cost-cutting and more aggressive management of patient care — not just denial of services like in the bad old 1990s, but also some pretty good preventive health programs.

Cigna said earlier this year that it expects to double its revenues over the next six or seven years, on its own, without a merger. Its expenses are dropping in large part as a result of health management of the people it insures. Evidence of this is the fact that, under federal rules, it's giving money back to customers because it spent too little on medical care.

Cigna, under CEO David Cordani, saw its share price increase by 238 percent — multiplying its value by more than three times — from a low on July 26, 2012, until one month ago, when merger rumors surfaced. This year's projected revenues are up 31 percent from 2012, and operating income is up 41 percent in that time.

Aetna under Mark Bertolini saw a similar stock gain since its recent low on that same day, July 26, 2012. Its three-year revenue gain was even larger, 68 percent, with the acquisition of Coventry Health Care in 2013, and Aetna posted a slightly smaller profit gain.

For Cigna, the $184-per-share offer from Anthem represents more than a fourfold increase since mid-2012.

Notably, the companies seeking to make acquisitions are also seeing their stock prices rise, which doesn't typically happen. Wall Street believes the larger, combined companies would post better numbers together than apart.

But history shows they'd do so on the backs of thousands of sacked employees — many of them in Connecticut — whether they are the acquirer or the company being acquired. And they'd squeeze health care providers as well as customers as they concentrated market power.

It's exceedingly hard to prove a link between mergers and higher prices because there are so many factors causing private insurance premiums prices to rise. But in a 2012 study published in the American Economic Review, Dafny and two co-authors showed that across all U.S. markets, the 1999 merger of Aetna and Prudential HealthCare raised premiums by an average of 7 percent by 2006.

They used that merger in their study because it was national, with significant overlap in a majority of the 139 health care markets, and prices before and after the merger were avialable.

"Our findings indicate that Americans are indeed paying a premium on their health insurance premiums as a result of recent increases in market concentration of the health insurance industry," the study said. "However, consolidation explains only a fraction of the steep increase in premiums in recent years."

Smaller-scale studies have shown similar results.

Executives, of course, talk about benefits to consumers, which is theoretically true — if larger insurers have more power to push doctors' and hospitals' prices down, and if their broad population-health measures work well.

But there are other ways to achieve benefits to consumers, if that's what the companies really want.

Dafny, who had a stint as an economist at the Federal Trade Commission overseeing antitrust in health care, suggests the companies can "invest more time in designing creative products for consumers, and in helping providers to deliver value rather than volume," before they seek mergers.

"There's a lot that insurers could do to try to create value," Dafny said. "Have they given it a try?"